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The US Department of Labor (DOL) announced on 10 March that it
will not enforce two rules written by the Trump administration that
would restrict retirement plan advisors from considering corporate
environmental, social and governance (ESG) as a risk factor when
making investments.
DOL is not rescinding the rules, but
said it will "revisit" them. Until it publishes further guidance,
it will not enforce any alleged violations of the rules.
In making the decision to suspend enforcement, DOL said it
re-reviewed comments from asset managers, labor organizations,
consumer groups, service providers, and investment advisors.
Commenters raised the question of "whether these two final rules
properly reflect the scope of fiduciaries' duties under ERISA to
act prudently and solely in the interest of plan participants and
beneficiaries," DOL said.
ERISA, the Employee Retirement Income Security Act of 1974,
governs how investment advisors manage and select investments for
pensions and funds available to be selected in a 401(k) or 403(b)
plan.
When the "Financial Factors in Selecting Plan Investments" rule
was proposed last year, stakeholders submitted more than 8,700
comments. The rule was published on 13 November 2020, and took
effect on 12 January 2021, though with a phase-in into 2022.
The second rule, "Fiduciary Duties Regarding Proxy Voting and
Shareholder Rights," was published in the Federal Register on 16
December, and it went into effect on 16 January 2021.
ERISA
Under ERISA, investment advisors have a fiduciary duty to manage
the investments "solely in the interest" and "for the exclusive
purpose" of providing benefits to participants and their
beneficiaries. ERISA prohibits advisors from using as investment
criteria "any non-pecuniary objectives or [to] promote goals
unrelated to the financial interests of participants or
beneficiaries."
To support the rules that are now not going to be enforced, the
prior administration stated that "ESG-type factors" were to be
considered non-pecuniary unless the investment advisor could
determine that those factors "would have a material financial
effect on the investment."
In other words, the burden of proof had shifted from ERISA plan
advisors being able to assume that ESG was a reasonable risk factor
to the advisors having to back up that assumption.
ESG as investing growth area
IHS Markit reports that investments in ESG funds are growing
steadily, adding about $50 billion in 2020 alone to reach $250
billion in the passive investment category. "Clients who want
exposure to passive funds and ESG will benefit from the expanding
availability of products offering diversified equity index
portfolios at low cost," IHS Markit said in a January 2021 report
on investing trends.
Two issues that DOL expressed concerns about -- consistency of
ESG standards and the "materiality" of those criteria to a
company's financial performance -- are high priorities within the
cleantech investing space, said IHS Markit. "Convergence and
momentum to harmonize standards and seek out a holistic solution to
ESG reporting will gain more traction," it said.
Materiality was, IHS Markit said, "the bedrock of a clear and
credible ESG and sustainability narrative, together with an
explanation of corporate purpose."
The American Retirement Association (ARA) said that one survey
conducted in 2020 found that 72% of the US population expressed
interest in ESG funds. In a letter to DOL last year to oppose the
"Financial Factors" rule, ARA said a growing number of active fund
managers (those who select investments rather than mirror broad
market indexes) "are recognizing the materiality of ESG factors in
evaluating investments."
For renewable energy firms, use of ESG is important for
attracting investors, said Gregory Wetstone, president and CEO of
the American Council on Renewable Energy. "These Trump-era rules
were intentionally designed to override the free market and
hamstring ESG investing, one of the nation's most important and
fastest-growing finance trends," he said in a statement on 10
March.
"ESG investments consistently outperform the market and are
often recognized as the best choice for realizing maximum long-term
returns. We are hopeful that Labor officials will soon reverse
these misguided policies entirely and instead adopt rules that
support and enhance sustainable investments nationwide," Wetstone
said.
Review of policy
In writing the "Financial Factors" rule last year, however, DOL
expressed concern that investors could be harmed by using ESG
factors. Because there is no single definitive definition of ESG,
it is prone to "inconsistencies … lack of precision and rigor …
[and is] vague and inconsistent."
But to support its new stance on the issue, DOL said that
stakeholders said the new rules actually created more confusion.
"The department has also heard from stakeholders that the rules,
and investor confusion about the rules, have already had a chilling
effect on appropriate integration of ESG factors in investment
decisions, including in circumstances that the rules can be read to
explicitly allow," DOL said.
The department also noted concerns about whether the rules "were
rushed unnecessarily." In particular, the "Proxy" rule had been
finalized after only a 30-day comment period.
Posted 11 March 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit